Why the ‘business case’ for diversity isn’t working

Workplaces and executive boardrooms should reflect the world’s diversity, and lots of companies are using the so-called “business case” for diversity to instigate action. But, popular as it may be, it’s a failed strategy.

You’ve likely heard a variation of the argument that companies with more diverse staffs produce better results for shareholders, or make decisions better than their homogenous counterparts. Unsurprisingly, you can read this logic trumpeted in the Wall Street Journal and the Financial Times, but lately even nongovernmental organizations such as Oxfam have been championing equality for its business value.

But, what’s puzzling about everyone’s obsession with the business case logic is that it’s not working. The  2020 Global Gender Gap report by the World Economic Forum shows that at the current rate of progress, Europe won’t reach gender parity for 50 years, and it will take 100-150 years in North America. We are even further behind on achieving racial equality. Studies show that rates of hiring discrimination against African Americans haven’t declined in 25 years.

Corporate leaders would be better served if they stopped trying to justify diversity with profit margins and stock charts—a mentality that can ultimately hurt the very groups these policies are meant to help (more on that in a moment)—and instead embrace diversity because it is the right thing to do.

Origins of the business case for diversity

The idea that corporations have to justify their diversity programs economically is a relatively new phenomenon.

Women and people of color have long been excluded from corporate America. In the 1960s and 1970s, civil rights and social justice movements set about trying to change that. At that time, help wanted ads often specified that certain jobs were only for men. The job ads targeted to women—secretarial roles and the like—might put in a requirement that women applicants be attractive. Similarly, in 1970, only 25 African American (men) were in vice president roles in major corporations.

Amid pressure from the Civil Rights and Women’s Liberation movements, companies started integrating their workforces. Federal equal opportunity laws got the ball rolling, notes Harvard Professor Frank Dobbin in his book, Inventing Equal Opportunity. The Kennedy administration, for example, mandated affirmative action to end discrimination in hiring against African Americans (the mandate got later reinforcement from the Civil Rights Act of 1964). Pioneering women and people of color still faced bias and prejudice, but businesses were forced to comply.

Throughout much of the 1980s, President Ronald Reagan’s administration actively sought to end affirmative action, arguing that diversity undermined meritocracy. This theme has been echoed by President George W. Bush with his comments about “the soft bigotry of low expectations” and more recently by James Damore in his now-infamous screed, “Google’s ideological echo chamber,” which subsequently got him fired. Hiring women engineers, to his way of thinking, was somehow undermining quality.

In the face of these attacks, those seeking to create equal opportunity for people of all races and genders turned to “business case” rationalizations. Terms just as “the business case for women” or the “business case for diversity” arose first in the late 1980s as a coping strategy for attacks on social justice action.

But, what people fail to recognize is that the current system is actually an affirmative action program for those already in positions of privilege (read: straight white men). Take the recent study of Harvard undergraduates, which showed just that: 43% of white students were admitted because of legacy or donations, but only 26% of them would have made the cut based on grades or other indicators of merit. On the other hand, research on quotas shows that such targets tend to increase quality by giving highly qualified women and people of color a chance and eliminating the unfair advantages that the less qualified straight white men have had.

False promises

Yet, people are hellbent on making the business case for diversity. One of my concerns is that they make false promises. Take McKinsey & Co’s claim that improving women’s economic inclusion could add $12 trillion (or more!) to global GDP (full disclosure: I was once employed by McKinsey). That’s a lot of money, and the impetus for making the calculation is to motivate more concrete progress.

But, this claim is misleading and also potentially damaging to the cause. First, that number doesn’t consider the following: Will jobs be available? Will women be paid at equal levels as men? Who will do the lower paying jobs if women move into higher paying sectors (there’s lots of evidence that even unemployed men won’t go into relatively well-paid nursing because they think it is women’s work)? Will women be able to work as many hours on average as men given the gendered expectations for who is responsible for care work at home? Who will do the childcare, eldercare, and other work for households if women work for pay?

The result: we are highly unlikely to see these promised trillions. And, such failures may lead to disillusionment with diversity efforts.

The same concerns about false promises exist at the organizational level as well. To be sure, there is plenty of evidence that diversity is associated with more innovation and better decision-making. But, it’s not automatic. The evidence of a positive impact of women on boards, for example, is equivocal at best (though it is worth noting that adding women to boards doesn’t decrease performance either!)

As the late great professor Kathy Phillips of Columbia University has shown, diversity also creates friction just as it breaks down groupthink. Only the organizations that invest heavily in building their inclusion muscles are going to reap the benefits of diversity. What this says is that gaining the benefits of diversity also requires serious investments in organizational transformation.

No action

Why doesn’t the business case work? Recent research suggests that what’s required for transformational action is a moral and legal case. The business case, because it is based in an economic logic, undermines moral arguments and weakens resolve to make anything other than incremental change. Indeed, experiments show that making the “business case for diversity” can increase bias against diverse groups while the legal case can inhibit bias and increase equitable behavior.

The business case for diversity also provokes people to focus more on economic than equality-based metrics of success. As a consequence, when there are downturns in organizational performance, believers in the business case are more likely to see diversity efforts as ineffective and to support dropping the organization’s investment in diversity programs.

Pamela Newkirk points out in her new book, Diversity, Inc.: The Failed Promise of a Billion-Dollar Business, that the main beneficiary of the business case for diversity so far has what we might call the Inclusion Industrial Complex—consulting firms and Diversity & Inclusion professionals who can profit from putting diversity management programs in place.

Hurting those we are making the case for

The other reason the business case doesn’t work is that it hurts those the case is designed to help. Women or racial minorities, who are the supposed beneficiaries of the “business case for diversity,” may experience negative consequences.

The latest experiments have found that exposure to an organization’s business case for diversity decreased a sense of belonging to that organization for women and for members of the LGBTQ community, which was then associated with lower desire to join and lower performance on the job. The business case language has a way of making people feel “othered” and devalued.

Even more insidiously, the presence of diversity policies tends to make the majority groups feel like the organization is doing its part, which then legitimizes the status quo. While creating roles such as Chief Inclusion Officers or Directors of Diversity and Inclusion can drive action by giving a point person a mandate to make change, it also risks disengaging everyone else in the organization because they figure someone else has “diversity” covered.

What’s next?

So, what are we to do? If the business case isn’t working, what other arrows do we have in our quiver? The answer is in taking principled action. Relying on the business case to motivate the kinds of transformations we need to achieve social and economic inclusion will only ever lead to incremental change. We need instead to set quotas and return to affirmative action programs (or, said differently, eliminate the current systems that unfairly advantage dominant groups). We also need to transform work practices to make people of all kinds feel like they can do their best work. This is the only way we will achieve a truly level playing field.

Increasingly, companies are taking these kinds of principled stances. Salesforce has invested millions in analyzing wages and closing the gender pay gap. Many companies took a stand in North Carolina against the “bathroom bills” that discriminate against transgender people. Microsoft eliminated “stack ranking,” which amplified bias against women’s advancement.

Should we give up on the business case? It is worth noting that one of the reasons we don’t yet have compelling evidence about the economic impact of diversity is that we haven’t truly moved to inclusion and belonging. Diversity by itself will not produce the benefits that companies and policymakers wish to achieve. My sense is that by taking principled action, we will find myriad ways that more diverse workforces benefit companies and society. Said differently, we will eventually arrive at the business case; we just can’t start there.

Sarah Kaplan is author of The 360º Corporation: From Stakeholder Trade-offs to Transformation, distinguished professor, and director, Institute for Gender and the Economy (GATE) at the University of Toronto’s Rotman School of Management.